oU'.  *5u  /^QG) 


3ui"ep.u  of  i\{;.-- .^.-.  v,iral  i^: -S 

Division  of  Cocporatlvd  Markotins. 


US  DEPOSiTORV 


SUBSILLARY  CORPOIUTICNS  AND  CCOPiiUSIVE  ASCOCI.-T 


aO^aO 


A    ?reliniiiisr;y     Heport 


^ashis^oci,  I).    ^. 
ScptcDbcr,   1926 


r 


This  report  prcFontc 
Bonxs  of  the  ros'XLte  of  research  condiicted  by 
Tha  Division  of  Cooporativo  Wai'keojng 
in  tho   or^anizr'.tion  lud  operation  of 
cocperr.ti''o  r.ssociiAtions. 


1 


S'JBSIDI^Y  CORPORj\TIONS  ;dTD  COOPEII.MPIVE  /iSSOCIAIIOKJ 

By  L.   S.  Hulbert,  Senior  torketing  EconoLiist, 
3uxeau  of  J^rioulturol  ^onumicc 


A  subsidiary  corporation  is  one  c^vncd  and  controlled,  eithor 
diroctly  or  tiirough  trurtoes,  by  another  corporation,     CoainorciJ!.l  corpora- 
tions for  manj'  years  nave  forniod  and  omployod  subsidiviry  corporations,   and 
recently  c*- operative  ascociations  have  organised  subcidiary  corporationc 
to  or*ablo  tnoc  to  conduct   their  <a,ctivitius   to  bettor  advanta/;o  or  to  moot 
specific  cit\2ation8. 

probably  the  cMef  reason  for  tho  creatioii  of  subsidii^ry  corpora- 
tions has  been  to  avoid  the  payment  of  tanos  impo°od  by  Strtos  upon  foreign 
corporations.     Ail,  or  practically  all,   of  the  States  impose  a  spoci:il  ta:: 
upon  foreign  corporations  nhich  do  an  intrastate   u^tninoss  rithin  their 
borders,  and  corporations  operating  in  core  than  one  State  in  miiiierous  in- 
staxxes  have  forjied  subsidiary  corporations  under  tho  lavrs   of  such  Gtatoc 
through  vrl^ch  they  hr.\'^  conducted  t}itoir  b^oi-inesi:   in  such  Sta«es,   thus 
avoiding  the  payment  of  State  tar.es  upon  forsign  corporations. 

Cf  coiirse,   if  a  corporation  is  engaged  in  interstate  coinmorce,   uo 
State  in  which  it  is  so  engaged  has  the  right  to  ta;:  the  privilege  of  en- 
ga^ins  la  such  coiEcurce.     Attention  is  called  to  the  fcllovrin^  quotation 
froD  the  opinion  of  the  Supreme  Court  of  the  United  States  in  the  case  of 
Bahnice-Maljcer  Co,   v.  Bondurant,   2t>7  U,   S.   28.3,   291: 

"A  corporation  of  one  State  ir\ay  go  into  another  -.vith- 
ouz  obtaining  tlio  leave  or  licence  cf  the  latter,  for  all 
the  lo^tisate  purposes  of  such  interstate  coDrr.ercu;   and 
any  statute  of   the  latter  State  v.hieh  obstructs  or  lays  a 
burden  on  tlie  exercise  of  this  privilege  is  voia  'ojtidor  the 
cozncrce  clause." 

.'ianj*^  cooperative  associations  are  now  doing  an  intrastato  biosineoo 
in  various  States  and  so  the  saiae  reason  that  has  prompted  the  for.^.tiJi! 
of  nany  subsidiary  corporations  by  cOinrseroial  corporations   -  tho  avoidance 
of  State  ta^es  on  forei,f;n  ccrporation  -  would  unaoubtecily,  in  some  instances, 
bring  about  the  fcrnatioi:  of  loc^  cubcidiar^r'  corporations  by  such  coopera- 
tive associations. 

In  ^;cncral,  one  of  th3  nain  reasons  for  tho  fornation  of  a  corporation 
of  any  character,  nairely,  lixited  liability  on  t"i»e  part  of  thosw  rvho  are  mcui- 
t  re  or  etockjicluers,  exists  as  a  reason  for  tho  formation  ol  subsidiary  cor- 
•^-"^   ons,     A  cooperative  association,  for  instancj,  „'i^ht  be  •.rillir.e;  to 

-  a  certain  portion  of  its  asr.utc  in  a  given  activity  ont  ^oc\d  not  care 
to  rieic  ail  of  its   assets  witn  respect  to  such  activity.     Under  sixh  circiiir.- 
ct:.jiccc  it  ciay  bo  d-siratle  to  fora  a  subsidiary  corporation  for  the  j/irpobo 
cf  conducting  that  activity. 


-  2  - 


A  subsidii..^  corporatior.  affords  a  :  .   ..     of  "departirwntaiizirg"  a 
bxisiaeas  co  th:\t  thoru  i»  a  ooparation  in  i         3  mil  aa  frou  a  practical 
standpoint  of  Uxo  divicions  of  tho  bixsinoce. 

The  Uichican  State  r'arm  Buraau  at  ona  titoc  onga^d  in  a  nusiber  of 
8  activities.     Now,  all  of  these  activities  cjro  handled  by  four 
:•■   -•—.-•---.      ""l  of  f:  -    -"'ck  of  vhich  is  owned  by  the  K'ich- 

.jh  co:-_  .oTit   iacludi:^  tho  parent  orp^niz:^- 

tion,  i^aB  tr*o  same  Doard  of  directors  and  ofiicors,     Ono  of  tlio  subsidiary 
—   --  *•'    -     '    r.dlus  sujpliec,   aiiOtiicr  soeds,  another  nool  and  the-  foxirth 

.V  c  .ofcrj.tivo  ::.w-soci;.tion  coiiia  oo  -ca  77itr!   ciutiioro-^y  to 

handle  over/  i^'po  of  agricult',iral  prod'jxt   .  ud  in  a  2i-^'-n  region. 

contract  covering  all  of  such  products  could  be  entered  into  with  each 
BJeTiior  aii^  theu  for  tho  pui-pose  of  effoctirg  a  Boparation  of  the  v 
activities  involved  in  ths  handling  of  the  diff  rent  products,  £uc.      .      y 
corporations  could  bo  fonued  for  tho  pxispose  of  Landling  ejid  nHi'keting 
cuch  of  the  products. 

Difficulties  with  respect  to  income  taxoa  may  arise  in  the  case  of 
cooperative  apsociations,  prinarily  organized  to  Tcarket  specific  farm  pro- 
ducts,  out  of  a  quectioa  :-s   to  the  proper  scopj  of  their  ^erporatc  po.veis 
and  activitieii.     The  activities  causing;  these  difficulties, it  is  believed, 
i  uccs  eould  be  so^Trecated  through  subsidiary  corporations  no 

*--- --.Id  net  affect,   from  a  a  income   tcx  rt-   .d^cint,   th^    .v.ioril  :jc~ 

tivitios  of  the  association. 

In  fact,  if  a  cooperative  association  in  any  caco  four^d  that  the  con- 
duct of  a  particulai'  activity  coropiicatcd  its  income  tax  probleni,   it  ni^t 
1  '  '  '-L*  corsidoi'ation  to  the  foriLation  of  a  subsidiary  c        •      - 

t_ —  particular  activity.   Of  course,  if  the  sub&idiar^   . 

profits,  it  T-ould  bo  liable  for  taxes  en  such  profits,  and  anj'  dividends 
v.aich  a  c.  -ive  association  ndgl-it  receive  in  any  year  from  its  subsidiar;' 

in  proper  _   —  rould  also   Ov,  tuei-le. 

The  foi-mitio:»  of  f.  S"      .ry  corporation  mry  rfford       .^  of  borrow- 

i -!'•  '^^.noy  which  co'old  not  ot —    . -e  be  as    aafiiiy  or  advauta^t ^    obtained, 

.  tlae  placin,:  ol  assets  vrj  th  &  subsidiary  corporation  thiLt  no\ild  not  be 
to  t-.  p  of   cho  ^orenc  co~poratlon.     The  C  ivc  '»r  -ue 

I. ,,ion  T^^ -  of  Ithaca,  IIcw  Yorh,  hac  eniplojod  e_.:,_*ar7  cc: :_.:.& 

in  its   oporatione.     For  ii^stiUice,   it  er^ani-od  the  New  York  Vi^^'^tural  Credit 

tion.   In"-.,  viith  offices  et  It^rca,   Wc-.'  Yori^,  for  tne  e  cf  in- 

c-      •     •••  dlt  facilities.     TMs  corporation  ondorLos  tl;o  nj-._-    -:    farnioi^  ?n 

leci*.  -              tiveo  who  are  pp.trona  of  the  Jran-sc  League  tederatiou.     Following 
endorsutcent ,    '                r,  if  accc    •        - ,  io  passov.  on  to  tho  Ir.  iate  Credit 

Bank,     TtiO  prv^w^-v.—   -^rived  fre v.».5  thus  haadlod  are  i-etur ,c  the  cor- 
poration wiiich  roraits  thjta  to  tl*e  per&ou  to  rhoa  credit  is  extended,   less 
interest. 


-  3   - 


No  attempt  is  here  mad©  to  enumoratci  all  of  tho  roaconn  that  may 
cjist  for  tho  fcnaaticn  of  subsidiary  corporatious,     Thu  laws  of  a 
particular  St£.to  aay  virtually  conpcl  the  forpi^tion  of  a  subRidiary 
corporation.     The  Suii-iiai .'.  P.aisia  Growers  of  California,  for  inetanco, 
at  tho  tirco  of  its  reorganization  a  for  years  ario  raa  dcsirour.  of  obtain- 
ing u^ore  capital  than  it  believed  possible  to  secure  from  jts  prodacor- 
nemberG,     Consideration  was  then  given  to  the  soiling  of  non-voting  pre- 
ferred stock  to   "outsiders,"  that  is,   to  any  person  v;ho  alight  care  to 
purchase  such  stocic.      It  ras  fouad,  however,   ti^at  unuor  tho  laws  of  Cali- 
fornia it  'as  not  possible  to  isav.a  stock  tiiat  did  not  carry  the  i*ignt  to 
vote.     In  addition,  it  ras  thought  tl^t   tiio  icsu;jace  of  proforred  votintj 
stock  in  the  Sun-ltdd  Raisin  Grovrerc   of  California   to  lion-producorc  '.vonld 
operate  to  prevent  the  aaeociation  from  successfully  snov/ing  ttiat  it  was 
operating  under  the  Capper -Vol stead  Act, 

In  view  of  tb^se  circuiastances  a  subsidiary  corj^oration  'ondor  tho 
laws  of  Delaware  was  organized  with  comcon  and  preferrod  ctock.     /J.1  of 
the  cocEjon  stock  is  ov:ued  by  the  Son-ifcu  .1  Eaibin  Growers  of  Celiforria, 
wLilo  the  preferred  stock,  phich  is  non-   oting,  has  been  solu  to  non- 
producers  as  well  as  producerc,     Inasnroch  as  the  conmon  ctock  is  the  only 
stock  -hich  carries   the  ri^ht   to  voLe,   the  Sur^-iJaid  Kaisir.  Grov  srtJ  of 
C^Jtifornia  controls  the  subsidi?.ry  corporation  to  which  it  trans fcrr.'d 
certain  processing"  plants  and  facilities,  vrhich  process  the  raisins  re- 
ceived by  Ihe  S\in->iaid  F.aieia  Growers  of  C.alifornia  from  its  iroUibc;xS. 

A  cooperative  association  must  be  authorized  to  acouire  the  stock 
of  other  corporatio^nc ,   or,   at  least,   of  a  corporrtion  of  the  kind  it 
desires  to  form,   if  it  is   to  form  a  8\ibsidiai-y  corporation.     It  will  bo 
recen-bered  that  at  conrx>n  larr  a  corporation,   generally  sp-^akin^,  was   not 
authorized  to  acqxiire  the  stock  of  otlicr  corporations.      (First  National 
Bank  of  Ottasra  v.   Converse,   200  U.  S.   425;    Contra!  Life  Sccaritiec   Co. 
V,   Si^th,   235  ?.    170.) 

In  vieT7  of  this  corE-on  law  rulo,   a  CJoperative  associaticn  before 
atterrpting  trx  forar.ti^n  of  a  s'ibsidiary  corporation  s'nculd  ascertain  if 
it  is  authorized  to  own  the  stock  of  a  corporation  engaged  or  to  engage 
in  the  business  in  question.     The  charter  Ox   the  cooperative,   the  consti- 
tution of  the  S*&tc,   its   statutes  pertaining  to  corporations,    and  the 
dccisicns  of  tho  courts  of  the  State  regarding  those  matters,   should  be 
exaain-d.     If  a  cooperative  is  author: zed  tc  engaged  in  an  activity  it 
may  bo  that  it  will  be  found  easier  to  form  a  subsidiary  for  conducting 
the  activity  than  if  Ew:h  TJcre  not  the  case.     Under  those  circi:mata.xe8 
the  subsidiary  might  bo- looked  upon  as  simply  a  moans  to  an  end. 

It  will  be  remembered  tl-at  restrlctlona  with  respect   to  the  persons 
eligible  to  own  stock  or  havf  meraoorship  in  a  cooperative  have  no  direct 
application  in  detensining  if  a  cooperative  may  bo  a  meiaber  of  or  hold 
stock  in  another  corporation.      In  some  instances  it  mey  be;  deymad  advis  .\.>x.. 
or  found  leg-^lly  necessary  to  raice  the  funas   to  bo  injeutad  J  a  a  eubsidiary 
through  deductions  specifically  authorized  for  tlie  purpose  by  a  pi'ovielon  In 
the  contract.      It  -sill  b--  borne  iu  mind  that  only  those  ded\iCtions  wl^ijh  aro 
-utiiorized  can  be  made  by  an  aocociation,     Silveira  v.   ^sociated  Llilk  Pro- 
ducers,   (Calif.)  219  P.  461. 


^  a  mlo.  It  IB              .ca  tro-rc  will  bo  loss  difficulty  in  find- 
ing authority  fc-  the  ^\-          jd  of  a  -.ubsidlary  by  e  cooperctive  if  the 
Buboldiary  is   .  ^^je  in  aa  acti'/lty  closely  rclateu  to  the  b'^iLoce 
in  7.-iiich  th  .ivo  i                    ,   or  ii.                         -      noction  th  — - 
nith,   If   1:.  .  "ith   :                    :^   the   .                            _    i  is   to  t 
place. 

Again,  if  tho  proposed  subsidiary  is  to  er-sage  in  an  activity 
which  would  be  wholly  propor  for  the  cooperative  association  to  on^a^ 
in             V.ich  for  any  reason  it  ie  deoioed  advisable;  to  have  porfomiud  by 
a  -   ,- .-  ,ic  coi-poration  there  chov.ld  be  little  difficulty  in  finding 
authority  for  tho  formation  of  such  subsidialy  by  it.     For  instance, 
aomu  vcs  Imvo  formed  vjaiehousu  corporations  prijiarily  to  con- 
duct ••  ..^ -  in  Phich  to  otoro  tho  proaucts  they  v.ero  eni?.:^ed  in 

inaricetinG.     Thoy  apparently  had  only  aoroal  difficulty  in  dcin^  so. 

with  respect  to  subeidiary  warehouse  corporations,   care  should 
bo  exercised  to'oalce  certain  that  thoy  at  all  times  have  "an  open, 
oxcluBivo  and  unequivocal  possesbiou"  of  tho  product  ctored.      il!ha 
Security  TTarehousinc  Co.   v.  Hand,   et  -^J..,   1-13  ?.  32,  2C6  U.  S.  415.) 
In  other  words,  c^jre  slxuld  be  exercised  not  only  to  hold  out  to  tho 
world  th/.t  the  EubBidi:.ry  coi-poraticn  is   the  "jarehoar-oiiTai."  and  not 
tho  ccio:jer5.tivu  association,  buc  axro  that   the  rarehoxise  corporation 
receives  and  delivers  products  ar.d  exercises  co!2plete  control  over  them 
while  in  storago,   j\ist  the  saiLo  as  if  the  products  rere  stored  ^^ith  a 
strictly  co!iEacroiai  v/arexiouseuan.     Iho  books  ana  records  of  the  yrare- 
house  corporation  should  bo  ceparate  and  distinct  from  those  of  the 
cooperative  acsociatioii,  tJid  in  all  respects  the  /rarehouse  corporation 
shoiad  function  as  an  indopoudout  entity.     .These  matters  arc  highly  in- 
portant  if  the  Taroho-occ  resei^jts  are  to  bo  ':£oC  for  collateral  purposes. 
Liany  bankers  will  not  loan  on  the  recoipts  as  collateral  if  the  ware- 
houue  cor^or^.tion  does  not  in  all  respects  ^unction  as  an  incependcnt 
entity  ana  exercise  an  aoroiute,  e;:clusive  and  iinaqvii vocal  control  over 
the  products  stored. 

Sorwtimes  sabsiliary  corporations  have  been  or^nized,  the  stock 
of  vrhich  T7a8  held  'oy  oertoin  persons  as   trusteos  for  th-.  -  c^rpor- 

*v  r.     Tor  instrnce,  in  the  care  of  *-he  Interstete  Tel-,,. Co.   v. 

T.-)rc  &  Ohio  7olephouc  Cc,  51  F.    '*9,  5-:  F.  50,  it  appeared  that  the 
iialiiaoro  &  Cido  Railroad  Co.,  owned  through  t-:-\isiees  a*l  of  tho  stock 
of  the  Baltinoro  &  Ohio  Telephone  Co. 

It  is  eubmiwtou  tU't  in  soue  Inotancfis  in  ^hich  it  ini- 

j^ys^iolc.    •'    --       "•-    "u  Btendpoirt,  for  a  cooperative  to  or^_.-^^   a  sub- 
sidiary -.took  thcrocf,  it  would  be  possible,  if  deemed  ad- 
visabla.  for  taa  cooperative  to  orji,ani2Q  e  thro  : 

tc.      -'       rsona  c   ^    -»:d  by  it,   to  whom  tho  .-..-.. Id  be — 

cc  .       osooc        -     .  could  then,  ualoso  prohibited  from  doiacg  to, 

loaJa  fflooey  to  tho  tubaidiary  o^.d,  ao  Poourity  tiujrofor,  co^vld  liold  the 
etock  of  *;.     -- '-loiory.     Propjrly  dravrn  contrccte  covering  the  relation 
.  .  i  to  tho  outJidiary  chould  bo  entered  into. 


Thw  statutes  of  aoXi;/  Sto.tos  providing,  for  the  incorporation  of 
corporatiooc  sti'.te  thr.t  thoy  may  bo  fonaod  "for  any  liinful  purpoae." 
Ttds  phrase  in  the  case  of  Dittnan  v.  Dictilling  Co.  of  America,   64  N.  J. 
Bq.   537,  54  Atl,  470,  Kas  hula  to  autboi-lso  the  formation  of  a  corpora- 
tion to  hold  stock  of  other  corporatione.     TTeirnt  wac  j^ivo:i  to  tl-io  fact 
that  corpors.tions  of  i<0T7  Jorscy  .Then  forrccd  rroro  i^uthorized  uudor  itc  l3'.7e 
to  hold  stock  of  otlior  ccporations. 

It  is  obvious  that  the  fundamental  principle  upon  vvhich  subsidiary 
corporations  arc  recognized  as  sepai-ato  and  distinct  from  tho  parent  cor- 
por.-:tion  arises  froD  the  fact   that  each  corporation  is  a  Roparatc  and 
distinct   entity,  a  logal  az'tificial  person,  and  oust  bo  dealt  with 
accordir^ly. 

The  case  of  the  United  States  v,  Ajoorican  Pell  Tolophono  Coj^jany, 
2S  ?.  17,  decided  in  188G,   is  one  of  the  first  cases  iuvolr'ine;  eubsidiary 
corporations,     Tae  Aikerican  .►^^ll  'lelephono  Coinpany  received  from  ^U-cx'-nder 
Gr?±uin  Boll  certain  telephone  patents  and  thereafter  proceedfjd  to  ostaj- 
lish  telephone  li-.cilitius  in  various  pans  of  the  coi^try.     Tt  did  this  in 
general  through  local  subsidiary  corporations  Trl-ich  it   o'.Tned  either  vrholly 
or  in  a  sufi'icient  degree   to  er^blo  it  to  control  them.     ?he  AF":rican  Bell 
relephone  3ompar.y,  as  a  role  at  least,  furnished  the  capital  needed  by  tne 
local  rubsidiary  corporatioLis  for  tho  purpose  of  enabling  them  to  estab- 
lish telephone  facilities,     riie  United  Stat^.s  in  the  case  under  discussion 
bro\;^ht  suit  against  the  .Vierican  Bell  Telephone  Conpi-xry,   and  claiiied  tnat 
process  had  been  served  upon  the  ^\3kiricF.n  Bell  Tolephcne  Compani''  by  reason 
of  thi;  fact  that  process  v:as  surved  en  an  officer  of  a  subsidiary  corpora- 
tion of  tne  .foerican  Bell  Telephone  Contpa-ij- .     The  court  h«ld  that   whe 
iu»rican  Boll  Telephone  Corpany  liad  not  beun  served  rith  process  in  the 
oviit  .mu.  her.co  7.-^s   not  a  party  tlxreto.      In  answer  to  the  ai'i^unent  thiat 
the  American  Bell  Telephone  CompcUiy  was  ene-a^ed  in  business  in  tlxe  juris- 
diction because  it  ov.noa  tlie  subsidiary  corporation  and  nad  furnished  it 
rith  tae  means  for  enablirig  it  to  io  business,   the  court  said:      "For  one 
person  to  supply  tho  moans  to  aaotaer  to  do  business  with  or  on  is  not 
the  doing  of  that  business  by  thr    lormc-r."     In  oth::r  rords  ,   the  court  l;eld 
^hat  thu  .American  Bell  Texepncnt-  Gor..xjar.y  vas  not  en£:a.:;ea  in  business  in  tne 
Federal  district  in  q-aestion  and  hence  could  noi;  be  s-aed  therein. 

In  the  cace  of  the  Peopl:;  v,  ;jnerican  Bell  Telephone  Co.,   117  ll,   Y, 
241,  the  saoie  ger^ral  eituationj   the  status   of  a  subsidiary  corporation 
of  the  Axericc-n  Bell  Tole^houe   Jcnprny,  -.vos  cgain  involved.     The  following 
quotation  is  ta^n  from  the  opinion  of  the  court   in  this  c-r^e: 

"It  is  ^tr.ifcst   that  so  r/aoh  of  the  argument   oi    ir.e 
coxirt  below  r.s  :s  bacod  upo.'   the  fact  that  the  jai'.rican 
Bell  Telephone  Gomt.any  la  a  stocklioluer  in  the  local  co?'5)anies 
derives  no  supr^ort  from  that  circximstejaco.      In  no  le.'al  sense 
can  the  business   of  a  corporation  be  said  to  be  that  of  its 
individUcJ.  stockholdors.     It  is  true  that  t>jey  have  an  interest 
in  the  bosiaeso  carried  on  and  an  influ»nce  in  con'      ''  Its 

cojaduct;   but  tney  have  created  a  legal  entity  to  ; 
such  business,  malce  its  contracts  end  be  reeporcible  for  its 


-  6  - 

oblif.atiomi,  and  that  entity  io  alona  responsible  for  its 

•ions,  emd  that  entity  is  alone  reepor^ible  to  persons 

<i J  with  it  for  the  conduct  of  such  wOCincEs.     The  taxation 

of  a  foreign  or  domestic  stockliolder  in  a  doiriystic  corporation 
■^  the  buainesr   of  such  corporation  upon  the  theory  tloat  it 
-  his  buyinese  vrould  bo  an  u^rea3on£.ble  exorcise  of  tho 
powere  of  taxation  ar^  such  a  tax  upon  the  theory  thr.t  a 
licoiisor  or  lessor  retaining  title  in  hinaelf  to  a  patented 
article,   borrowed  or  leased  of  him  by  some  person  or  corpora- 
tion for  tho  purpose  of  carrying  on  a  trade  or  business,  v.as 
Mccelf  carrying  on  such  business,  cin  not  be  supported  by 
•  r.y  >norn  principle  of  lav?." 

Tho  case  of  Conley  v.   Mathiesoa  Alkali   Worics .   190  U.   S.  406, 
arose  in  tne  State  of  New  York.     The  trial  court  referred  the  case  to 
a  matter  and  the  conclioding  part   of  his   report   read  =s  follows: 


II  n?T 


'Upon  the  facts   thus  outlined,   it  d.oez  not  ar^pear 
that   tlie  deienosnt  corporation  was,   at   the  tia»  of  the  service 
of  tho  s-oiraons  hsrein,   viz.,   .April  18,   1901,   doing  business 
within  this   State. 

"»Thc  fact   that  it  held  the  entire  capital  stock  of  the 
Saotner  Electrolytic  Alkali   Coinpany  and  that   the  operations 
of  that  co!npanj'  wers  carried  on  uiider  ti.e  same  manae'ecient  as 
before  Decoabar  51,   ISOO,   is  not  luaterial.     The  new  corporation 
was  a  separate  lecal  entity,   and  whatever  cey  have   been  the 
motives   leadir^  to   its   creation  it  com.  only  je   r^.araod   as   cuch 
for  the  purposes  of  le§al  proceedingf. 

"'It  was   that  corporation  alone  which  transacted  any 
business  in  this  State,   notwithstanding  i.  miy  have  been  for 
all  practical  purposes  merely  tne  instrumont   of  the  defendant 
corporation.     People  v.   ^.  Bell  Telep.ione  Co.,   117  i;.Y.   241; 
United  States  v.  The  Sai^,  29  Fed.   nep.   17."' 

The  plaintiff  excepted  to  the  report  of  the  master  and  the  case  eventually 
T-ont  to  the  Supreme  Couj-t  ol    the  United  States,  wiiich  court  approvingly 
qxioted  tl*e  language  Trom  tne  master's  report  given  above. 

In  the  caae  of  Peterson  v.   Chic^o,  Rock  Island  &.  Pacific  Railway, 
205  U,   3,  364,   the  court  said: 

■The  new  corporation  was  a  separate  legal  entity, 
aad,whatevor  may  have  bee.  .ves  leading  to  its 

creation,   it  can  only  be   :  is  such  for  the  purpore 

of  ler^l  proceodingp.     It  was   the  corporation  alone  which 

treAsactod  any  business  in  this  State',   notTithrtanding  it 

nay  have  been  for  all  practical  purposes  Tjerely  the  iustruroent 

of  the  defendant  corporation.     People  ^'.  .toerican  Bell 

'V  o  Co.,   117  N.   Y.   241;   Uiiited  States  v.   .Vreri can  Bell 

..c  Co.,   29  Fed.  Rep.   17." 


la  ^Qo  case  of  Pnilaat'lpnia  &  Keadinf;  njuiwoy  Company  v. 
JicKibbi:.,   C43  r.    S.    r^n-x,    t;..    ro.irt   s    Id: 

"I'Jor  would   the  fact,   xi   estabiifcf.ou   by  '■  -nt 

evidence  tiiat  subsidiary  cotnpanies  did  buaineb  .in 

the  State,  warrant  a  finding  tluit   the  defend.«nt  did 

business  there*",  v 
I 

In  the  cr.se  of  Trimble  v.  Railroad,   199  Mo.  44,  97  S.  V.   16-i. 
•-it*-  successfully  brought  suit  afltainst  a  corporation  f        * 

"€-  .    Jf   fees   for  services  which  they  claimed  they  riai  y  ^-<i 

fox  it.     All  of  its  stock  and  bonds  were   owned  by  anotlier  rnilroad  co/r 
pany.     The  following  is   taken  from  the  opinion  in  the  case; 


"The  stocl^holders  of  a  corporation  direct  its  business 
:.r    -^-      t  linj:  is  beet  Tor   their  ovm  interest,    ind  if  it 
^'^   •  ..i  th£..t   the  persons  v/ho  ovm  the  atpck  in  one 

rorporation  are  also   the  owners  of  the  stoclc  in  another 
-v   2nd  conceive   it   to  "be   to   their  interest  to  malx 
-■po ration  eubcervient  to   the  ether,   t\\ey  have  a 
:tt  to  do  ao,  beer  use  they  are  deaJ-inr;  v.ith  their  ovm. 
'-   i:    here  said  ic  of  course   sub.icct   to   this  qualifica- 
*- ■:  ,    *:;..t  is,    tliat   the   conduct  of   the   stocldiolder s 
•'-  one  corporation  subservient  to  another   is  valid 

.  it  is  not   in  viol-ttion  of  any  lav7  forbilclinf-  it; 
is  no   such  question  here,    v/e  are  nov/  dealing  v/ith 
cot  in  r/hich  an  ovmer  of  two  properties  sees  fit  to 

"3   the  advancenent  of  the  other  or  both   to  a  mtual 
—  nt.      In   such  c^se,   neither  corporr.tion   1.^:^^..   itc 
so:porate  entity." 

It   is    interesting  to  note  that   in  this   case  it   is    int:  r.' .tCwi  that 
only  Qooxistic  corporations   in  the   State   of  Louisiana  inay  cxe:\:xSo   the 
power  of  endaent  domain. 

A  recent  case  with  respect  to  subsidiary  corporations  decided  by 
:r.e  Suprerae  Court   of  the  United  States  is  that  of  the  Cannon  J/janufactur- 
i"  ■    '""rpany  v,   Cudahy  Company,   267  U,   S.   333.      It  appeared  tiiat  the  de- 
:  y  a  I^ine  corporation  engaged  in  the  packing  busine&s,  markclod 

its  products  in  Korth  Carolina  through  a  subsidiary  corporation  which  it 
—    :  -jinder   the   laws   of  .U.abama.      It   ov-ned  all   of   the  stock  o'"  ib- 

corporation.     The  plaintiff  brSugnt  suit  against   the  y:  . 
■  for  a  breach  of  contract  to  purchase  cotton  sheeting  for  use  in 
"    '  .      The  question  for  decision  was  nhethor  tiiC        "  v/as 

-   -  s   in  the  State  of  llorth  Carolina  in  such  a  l.  .  to 

sxicn  an  extent  as  to  warrant  the  inference  that  it  was  present  there. 
~  the   p-urpoce  of  s^iovring  that   this  v.as    the  case,    the  planti ff 
:  to  establish   oi.e   identity  betv.een  the  defendant  and  Ire  ;J. 
crporatioc.     The  court  said: 

*The  Alabana  corporation,  which  has  an  office  in  Ilorth 
Carolina,   is  the  iostrunentality  «)mployed  to  i&irket  Cudahy 


-  8  - 


product 0  Tritbia  tlie  Gtato;  but  it  does  not  do  tto  as  defendant's 
a^nt.      it  buys   from  the  defendcjit  c^id  sells  to  dcalcra.      In  ful- 
flllaont  of  cuch  conti'actB  to  'jcll,  t^oods  paclied  by  the  defend- 
aat  in  Iowa  are  shipped  direct  to  dealers;  and  from  them  the 
Alabana  c  .tioa  collecto   the  purchase  price,     Throuch  owner- 

ship of  t,.  ..ire  Capital  stock,  and  othorrise,   tiie  defendant 

docdnateo  the  ^ibama  corporac5oa,   inmediately  and  conipletely; 
arid  exerts  its  control  botn  coianorcic.liy  ana  fincjicially  in 
substantially  ti"^  same  way,  and  Ei£.inly  throui^h  tlie  sano  individ- 
uals, as  it  does  over  those  selling  Lirauches  or  departicents  of 
its  bvisinesp  not  separately  incorporatea  "/hich  are  estatliehed 
to  siari:ct  tho  Cudahy  products  in  other  States.     The  existence  of 
the  ;Llabainp  couipany  as  a  distinct  corporate  entity  is,  Iriorever, 
in  all  respects  observod.     Its  bocka  are  icept  separate,     All 
tratiiGactiono  betr-een  tlie  two  ccrporatioii':  are  reprciiented  by 
a^ipropriate  entries   in  their  "espec^ive  books  in  the  sarre  way 
::.s  if  tne   fro  vrere  wholly  independent  corporations.     Tins  cor- 
porate separation  from  the  ^eueral  Oodahy  businoss  w£.3  doubtless 
adopted  solely  to  secure  to  the  aeferdar.t  soi:)e  adva'ta^e  'uider 
the  IoccJl  laws. 

The  defendant  wanted  to  have  business   traixsactions  irith 
persons   re^idert  in  Torth  Carolina,  lut  for  regs^rs  satisfactory 
to  itcelf ,  did  not  choose  to  enter  the  State  iL-  its  corpor3.te 
capacity.     It  ndght  l^vv.  conducted  sucli  busiueso  tlirouf,h  an 
independent  a^^ency  -vithout  suojectiu^:  itself  to  the  .jurisdic- 
tion.      (Banic  of  Jjnerica  v,  TThitnay  Central  Natioiiai  Bank.  261 
U,   S.   171.)     It  preferred  to  eciploy  a  subniiiary  coiporation. 
Congress  hcis  not  pro'-i-dod  that  a  corporation  of  one  State  shall  be 
:utenable  to  suit  in  the  federal  court  :or  anothsr  State  in  Thich 
tho  plaintiff  resides,  v.he.'.ever  it  uTploya  a  subsidiary  corpora- 
tion aa  t.xo   instrujoentaiity  for  uoing  ousinesL'   tiiereia. 

The  corporate  separation,  though  perliaps  cercly  formal,  was 
real.     It  '..as  not  pure  fiction,     Thore  is  here  no  atteu^t  to 
hold  the   dof eudaut   xiau2c  for  an  act   or  onisr.ion  o:*"  its  sub- 
sidiary or  to  eril'crce  az  against  the  latter  a  liability  of  the 
def  verdant . 

Put  whata'^er  adj^ht  be  other  iejal  ccasequences  of  the  con- 
centration, we  cannot  say  that  for  purposes  of  .jurisdiction, 
the  buPinobs  of  the  ;^1.  jorporation  in  North  Caiolina  became 

the  ba'^ir'^'t.o   cf  vho  C'  nc." 

In   tie  caoo   01    r^iiirxj'b  rui  xe  G-r  ^o;.-r;\.iy  v,   .,a:i^oui'i   P        '"' ^' 
?jiilway  Coqpaa;',   316  b.   S.   58'^,   the  Supre-::vj  Cour*.  held  that    c^e  ^nt 

of  the  Hoilray  Coupauy  to  haul  cars  ovor  all  rc^us  which  it  c<-:.croi?..cd  or 
"may  control  "h;  'ip»   leaso  or  other     r."  did  i.ot  oblif-  it  to  haul 

care  over  a  c«.  .  .     xine  of  anotiier  c.   _  .  ,    "all  or  nearly  ell  its 

stoolc*  which  it  owned.     In  this  case  the  court  osphasiied  th^  fact  that 
the  coryorutions  were  in  fact  separately  oper:.ted. 


-  0  - 


In  the  case  of  In  Ro  '..aterto.Tn  ?a>ei'  Co.,  169  F.  25C,  tho  court 


said: 


"The  fact  wfu;  t~e  .;tOv;:Tl:o].'.er:',  oi  tv.o         y 
charterad  corpcratiour  are  identical,  that  on-        lea 
ia  aacther,  and  thi-t  they  have  niutui:^  dealings,  "^il--  not, 
as  a  faneral.  rale,  .       .a  into  cno  co^'^oration,  or  pra-» 

vent  the  onforcecen:  _  -  tho  insolvent  ool?te  of   the 

one  of  a-^  other.Tloe  valid  claim  of  the  other." 

In  Lan^a  v.  Purlre,   69  Ark.  P5,   61  S.  VV.  155,  a  crti,e  in  wliich  the 
tv.o  corporations  involved  Tvere  practically  controlled  o;-  the  sa-re  atock- 
holdera  and  had  had  intiraate  biu^incss  relatione,  incl^Jidin^  the  oxployicnt 
of  the  SciEe  ^oolzkeeper,  the  com't  held  that  the  clp.i.n  of  one  corporc-.ti on 
vould  ^e  enforced  :^ainjt  tl:ie  insolvant  estate  of  the  other. 

It  is  texieved  that  the  cni:'  irstvacos  in '"hich  tho  entity  of  a 
subsidiary  corporation  Trill  Ic  diGre<-r.rded  are  inutancea  analogOMs  to 
those  in  which  the  sep-rato  idoutity  of  any  other  corporation  wald  be 
disrct^ardea.  To  prevent  fraud  or  injustice,  tae  cou^'ts  will  disre^u.rd 
the  separate  identity  of  a  corporation  and  rill  lock  tehind  tn.  forui 
to  the  substance,  Soiae  of  Ire  cases  in  vrrdch  the  sorarate  identity  cf 
a  corporation  has   oeen  disregarded  TiuII  now  be  air.casued. 

In  t*-se  caje  of  tiie  First  i;iauio*isl  Ba^Jc  v.  r.    3,    Trebei.^,   59  C^io  St. 
316,  52  II.  S.  c3-*,  a  debtor  in  iailin^  circurstances  ferried  a  ccrnorfcion 
consisting,  of  hiocjlf  an.'  ccmbers  of  Ms  family  and  conveyed  all     his 
property  to  the  corporation  in  ezohance  for  btoc^  isr,-..£d  to  him,  ^.•hich 
Steele  he  irraediateiy  placed  rith  nis  cre'^itors  as  collateral  sec^u-it^, 
«hilo  .>e  retained  control  of  tne  property  and  laana^d  it  as  preoident  of 
the  Conpanj.     The  conveyance  '>7as  held  fravduieut,  end,     tmone;  other  things , 
the  Court  said:    "The  transaction  caniot  be  likened  to  a  conveyance  to  a 
third  person  for  a  valuable  consideration  —  considered  in  the  li^ht  of 
the  facts,  it  Tas  no  .^re  tl'^n  e.  conveyance  fron*  hiir-self  to  hiciself . 
The  corporation  ras  in  substance  arother  Y,   C.  Trobein." 

In  idnifie  v.  Rowley,   137  C&J..  -iSl,   202  P.   673,   it  appeared  z..   t 
Hovrley  individually  oorro'sred  $10,0oC,  giving  his  personal  notes   cherc— • . 
Subceq-uently  a  corpori.ticn  owned  "jy  hie:  renewed  the  loan  by  ^vint-:  its 
note  for  that  aii:0"<ant.     The  holder  of  the  note,  after  its  .Tiaturity,  su^d 
the  corporation  and  I-lorlcy  or   the  deot ,  ?nd  ihn  Court  held  tl:at  Rowley 
was  personally  liable.     3cs  also  J.  J.  McCaskill  Co.   v.  U.   S.,   216  U,   S. 
504,  54  L.   3d-.  590;   State  Trust  and  Saving  Bank  v.  Iler-oca  Land  2Jad 
^^ttle  Co.,    (X.::.  )  240  p.   -iSS.      In  this   'joruiC-cticn,   the  foxlo^'ine  Ot^otc'- 
cion  froE  the  opinion  of  the  S-ipronie  Co-art  of  :.;aryland  in  the  ca^e  of 
Carozza  v.  federal  Finance  i  Credit   Co.,   131  A.  232  is  of  inteiest; 

"The  equitable  rule  that  the  fora  of  a  corporate 
entit;'  may  be  disregaaded.  where  the  ownersliip  of  all  of 
it-'  corporate  ctock  is  tn  one  person  is  rot  of  gerer^l 
application,  but  ia  coLraonly  licdted  tc  those  instances  in 


-  10  - 


which  It  becooee  neccescjry  to  aioresard  a  formel  corporate 
exietcnco  to  prevent  fraud  or  inrposition  or  to  enforce  a 
paramount  ojoA  uuperlor  equity." 

The  Supreoe  Court  in  the  case  of  the  Hart  Stcol  Co.  v.  The 
B&ilroad  Supply  Co.,  2-;-i  U.   S.  £94,  applied  the  fundameutal  rule  of  law 
that  a  Judgment  of  a  court  of  coiEpetent  jurisdiction  is  tindine  upon 
tha  parties  to  the  cace  in  wiiich  rendered  and  their  privies  in  a  situa- 
tion iuvol\'ing  a  piixeut  corporation  and  its  subsidiary  by  holdir*^  that 
a  Judgmeat  rendered  againct  a  patent  owner  in  a  euit  broiight  by  hiia  for 
infringesoent  against  the  parent  corporation  could  be  pleaded  as  a  bar 
to  a  suit  brou^t  by  him  against  its  subsidiary. 

it^ain,  in  the  case  of  the  Chicago,  M.  &  St.  ?.  Ry.  v.  Minn. 
Civic  «38ociatiou,  247  U.   S.  'iSO,   the  court  held  that  the  tvro  railroad 
companies  involved  could  not,   through  the  medivm  of  a  short  terminal 
railroad  which  they  owned  jointly,   discriminate  afoainct  shippers  whose 
cars  were  handled  by  it  by  requiring  such  sMppers  to  pco'^  special 
handling  charges  on  account  of  the  fact,  while  shippers  receiving  sub- 
stantially the  same  service,   but  '.vhoce  cars  did  not  pacs  over  the  terjdnal 
line,  v;ere  not  required  to  pay  euch  charges. 

Tlie  courts  by  reason  of  a  statute  may  have  to  disregard  conyletely 
or  to  a  degree  the  entity  of  a  corporation. 

The  case  of  the  U.   S.   v.  D.,  L.  «S:  V7.   R.   R. ,  238  U.   S.   515, 
which  arose  under  the  coiomodity  clause  of  the  E^pburn  i^ct  illustrates 
t'.i'j  situation.     Tliis  act  '•.'as  intended  to  prevent  railrosidc  from  occupy- 
. :. J  the  dual  azid  inconsistent  positiano  of  public  carrier  and  private 
shipper,  and  in  order  to  separate  the  business  of  transportation  frosi 
the  business  of  soiling,   the  statute  made  it  unl:;T?ful  for  railroads  to 
transport  in  interstate  cooL^rce  an^*  coal  in  which  the  Company  liad 
"any  interest,  direct  or  indirect."     It  appeared  that  the  railroad  coii- 
pany,  prior  to  the  passage  of  the  Hepb'irn  xiCt,  had  engaged  in  the   Duci- 
ness  of  mining,  buying,   transporting  smd  selling  coal.     Follorring  the 
passage  of  the  Act,   ihe  railroed  couipaay  "decided  to  adopt  a  plan  by 
which  to  divest  itself  of  title  after  it  xiad  teen  mined  out  before  trsuis- 
portation  began,"     It  thereupon  caused  a  coal  coiapany  to  je  incorporated 
having  stockholders  and  officers  in  comtion  with  the  railroad  company. 
The  two  corporations,  nriving  a  conxion  r:.  nt,   then  saae  a  contract 

prepared  by  the  railroad  company  under  •    . .      :he  railroad  companj'  did 
not  F.o  out  of  the  mining  and  selling  business  but  when  the  coal  7.as 

t   to  tho  surface  the  railroad  company-  lost  title  by  a  sale  to  t  he 

^, .jupaay  f,  o,  b,  ainea  and  instantly  re<5aincd  possession  as  carrier. 

It  retained  tnat  position  until  delivery  to  the  coal  company  w'nich  sub- 
seqxientiy  paid  tncrefor  at  the  contract  price.     The  relation  between  the 
railroad  coc^pany  and  the  coal  coi:5)any  Tas  covered  by  a  comprehensive  con- 
tract cont€Lining  provisions  restricting  and  limiting  the  nethodr.  that 
mi,2:ht  b  il  by  the  coal  c  •  and  the  porers  wliich  it  night  e;:er- 

cise,      ...^   ._^..cmo  Court  decide-   —  case  against  the  railroad  company' 
and  hfild  tnat  it  should  be  enjoined  from  transporting  coal  under  the  con- 
tract in  question.     The  basis  for  the  opinion  was  the  character  of  the 


-  il  - 


contract  arid  tho  identity  of  :■  ^nt  between  the  railroad  corDpt.ay  and 

the  coal  congjaijy.     The  court  l.,  .    .*  ..tly  recognized  the  right  of  the 
stockiicldorj  of  tho  railroad  ccznpauy'to  cwn  ctcck  In  tho  coal  coojpary. 

There  arc  cases  in  which  a  parent  corpcr_wi<.ij  .las  'oeon  held 
liable  on  account  of  acts  or  dama^oe  for  -#hisb  it  ciaiiced  its  ouboidiary 
alone  was  rccrorcible.     It  is  believed  that  all  cf  th^oe  cacea  will  be 
found  to  involve  situations  in  which  the  parent  corporaticn  lian  failed 
to  treat  and  deal  wit,h  the  subsidiary  in  all  respects  no  fxd  indepondant 
distinct  e.  tity,  or  because  the  contract  involved  nao  rith  the  parent 
corporaticii. 

In  tho  case  of  Joseph  2.  7oard  Co,   v.  SJtate  of  Maryland.  219  ?. 
627,   the  parent  corporation  was  held  liable  x'pr  the  daiL':.g€S  caioced 
throvsgn  the  explosion  cf  dyraaate  on  a  ship  thao  vvaB  Vein^^  unloaded  by  a 
subsidiary  corporation,  which  it  claiiacd  v.ua  an  indepondw-nt  contractor. 
In  tiiis  connection,  the  Circait  Coui-t  of  il^^pocilQ  fo*'  the  Tou-vth  Circviit 
said: 

"The  Disti'ict  Cuurt  ras  clearly  right  in  holding 
untenable  the  position  taken  by  ths  Fcrrd  Cor^oTiy  tliat 
the  loading  rras  dona  by  tne  General  Stevedoring  Conpany 
as  inceper.der.t  contrac*;or  and  that  it  aJ  oue' was  respcasible 
for  any  ne^^ligence  in  handling  tho  dynamte,     VTiia.tovor  'ray 
have  been  the  original  design  v;hen  the  Foard  Coicpany  caused 
to  be  orga:iized  the  Geusriil    J3tevedoriivf  Corjo^ny.    the  evidence     • 
leaves  no  aoubt  that  the  stevedoring,  rhether  done  under  ore 
or  the  other  corporate  naross,  was  i;i  reality  but  a  df^particeiit 
of   tho  busjrepf.  of  the  loard  Cor'Tjany  as  ship-bro]rero  and 
agents.     Che  two  conpar.ies  had  tne  Scjue  officers;    the  Steve - 
dorii^  Cotrpany  handled  no  funds,  except   through  the  Foard 
Cocpr-ny;    its  losses  were  pfid  V  tne  Foard  CoDpc>ny  and  dealt 
with  as  if  they  were  tnat  Ccopany's  own  lo&ses.     All  of  the 
profits  of  the  Stevedoring  Co/Lpany  rrere  kept  by  the  Foard 
Cojppp.ny  as  a  c^^rc,<i  for  j?i?a£;ing  the  business.     There  are 
ether  lik:;  ci rears tanccs ,  hut   these  are  3uf:icicnt  to  show 
that  the  Stevedoring  Compc^uy  was  organized  and  controlled  and 
Its  affairs  so  cond    rteij  as  to  uiake  it  a  mere  insiruir.entality 
of  the  Foara  Corjpany.     This  being  so,   the  two  corporations 
uaist  be  regarded,   as  to  the  outside  public,  ido:;tical.'»°'">«" 

It  is  subcdtted  that  the  foregoing  lan^-iiiage  of  tho  Coiirt  is 
caterially  explained,  aid  luodified,  by  the  following  quotation  from  the 
opinion: 

•'Bat,  even  if  the  usual  current  of  busmecs  of  tho  tv/o 
corporations  h<id  been  separate,   jn  this   iii'jtanca  t:.  * 

to  load  tne  vessel  ras  with  the  ioard  Coapony,  and   -.  -    . nee 

tends  to  sMw  that  it  ciade  no  separate  contract  with  tho  SC^ve- 
doring  Company,  but  co-operated  rith  ard  coiapletely  controlled  it." 


-  12   - 


In  Ihc  caae  jx\ct  referred  to,   l^u  ccatract   to  load  the  vessel  laao 
made  with  the  p,:iTont  corpoialion.     If  the  coutrax:t  had  beon  made  with  the 
subsidiary  corporation,  it  is  subicitted  that  an  efi'i-irely  different  question 
wo'Jdd  h.Hve  beon  presented.     Attention  io  called  to  tho  f:iCt  that  cne  who 
contracts  rrith  a  corporation  is  generally  thereafter,  with  respect  thereto, 
eetopped  from  denying  the  corporate  existence  of  the  corporation. 

In  the  case  of  Lehcanv.  Warner,   61  Ala.,   455,  the  Court  said: 

"It   is    tou  ^ell   cctiiea   nos   to    cio   contrcver-.u   zr^t 
a  party  who  contracts  with  a  corporation,  v:hether  it  be  by 
subscription  to  its  stock,   or  by  promisf-opy.^oVp.bond, 
•0,   or  other  fore,  of  contract,   is  estopped  from 
•  the  corporate  existence  of   the  corporation." 

i:.  tr.e  case  of  Close  v.   Gloudwood  Ceioetry,   107  U.   S.  460,   tne 
Supreoe  Court  said: 

"One  who  deals  with  a  corporation  as  existin.s  in  fact 
is  estopped  to  deu^"  as  against  the  corporatioa  ti-at  it  has 
been  legally  organized." 

In  other  words,   the  cases  just  cited  and  others  of  similar  import 
hold  that  one  who  has  contracted  v;ith  an  orgSLnization  llo  though  it  were  5. 
C'       .     tion  is  estopped  to  show  tliat  the  organization  is  not  a  corporation. 
£j    -    — (Si   i^  would  seem  to  follow  that  one  who  h^s  dealt  with  a  subsidiary 
corporation  as  principal  would  be  estopped  from  claining  ttiat  the  parent 
corporation  was  liable. 

On  March  10,   1926,    the  Suorerae  Court  of  the  United  States  decided 
t^  of  Edwards  v.  Cliile  Copper  Co.,  46  Sup.   Ct.   345.     The  following 

r-.       .   .z  are  ta^n  from  the  opinion  in  the  case: 

"The  Cliile  ."iw-ploraLion  Coirpar.y,  a  Hew  Jersey  corporation, 
owned  mines  in  Cliile  and  neeaed  to  borrow  large  sii:^  of  nioney  in 
order  to  develop  them.     3y  the  laws  of  Chile  it  coxJ.d  not  njortgage 
its  mines  effectively  pnd  therefore  could  not  give  sccm*ity  direct- 
ly for  bonds.      2o  meet  tne  difficvCty  th«  Ciiilo  Copper  Gomparjy  was 
organized  in  roi£.ware  for  tho  purpose  of  holding  tho  capital  atock 
of  the  CMle  Exploring  Company,  issuing  bonds  secured  by  a  pledge 
of  the  stock     -  —  -   ■^ximishing  the  proceeds  froji  time  to  time  to  tho 
Exploration  :         .,    to  enable   the  latter  to  go  on  with  its  work. 
The  purpose  was  caiTiod  out." 

"••♦•♦•♦There  was  eone  suggestion  that  there  was  only  one 
":  3  and  taeruforo  ought  to  be  only  one  tax.     But  if  ihe  one 

l.uuii..,ii3  could  not  be  carried  on  v.ithout  two  corporations  taking 
part  In  it,   eac^  rrjust  pay,  by  tho  plain  ror''?  of  the  Act." 

Pjirti^wil.'  r   utt(.'i  ui^a   18    callu.    tj    t.iu    i^tvf;    ^urt    y:    Vrje    Icp^uagO 
Jttst  qiioted,   in  which  the  Court  sa^-a  that  if  the  business  coiild  not  be 
carried  on  without  two  corporations  taking  part  in  it  tliat  each  must  pay. 


-  13  - 


by  the  plr»in  rords  of  the  Act,   thus  rocognir:in^  the  differonco  in  identity 
of  tl.o  two  corpor.itior.o. 

In  wi*dor  that  a  sx.'jsj.diar:'  co:*ponrtior.  rsny  be  fully    •  i  ar 

an  artificial  person  distinct  and  eoparato  fron  the  yaro.it   ..    .    ou, 

care  should  bo  exorcised  to  coe  the.t  it  is  treated  and  regarded  aa  cuoh 
in  the  practical  operations  of  the  ovsinooc. 

A  subsidiiirj'  corporation  shoxild  be  hold  out  to  the  world  for  rhut 
it  is,  naarly,  ?.  sepsj'ate  corporation,  a-^d  reprssontatior.  should  not   ?o 
isade  that  *oald  nlsload  persons  dealing  rrith  it  as  to  its  r-sd  chartxtfir. 
Parties  who  deal  with  a  subsidiary  corporutioc,  when  they  know,  or  should 
know,  that  the  r-ubsidiary  corporation  is  net  the  parent  coi-poration,  cnouli 
be  estopped  from  clcdming  tliat  cin  obligation  created  by  the  subsidiary  is 
the  obligation  of  the  p?rent  coixorr.tion.     Generally  spe5>.in(i,  it  is  eub- 
Eitted  that  there  is  no  roore  reason  for  al]o":'in;;];  persons  aeaiing  V7ith  a 
subsidiary  corpcrcition  to  lock  to  the  parort  corporation  holding  itc  stock 
than  there  is  for  allor-ins  parties    to  look  to  the  stootrhciders  of  erxj 
other  corporation. 

If  th9  subsiai-ry  corporation  if  d'^alt  with  on  an  ageucy  "baiis   \,].'jn 
it  Tould  follox  that  the  parent  corporation  rould  be  liable  for  its  acts 
and  conduct,   for  it  r.ill  bo  remeu.beicd  tb*it  ^  corpora"i,ioii  like  a  natural 
person  r^ay  act  as  the  agent  of  a  coi-porstior..     Attention  is  caljc-vl  to  the 
foilovi-irix:,-  quotation  from  the  opinion  of  the  ouprsie  Jcurt  of  Alabara  in 
the  recent  cas3   of  the  Ala.  Pov/er  Co.   •',  ■iodine.    :"^''  -""o.   So9: 

"Ths  relation  of  inaster  and  scrvaiit  ixiy  exist 
between  covpo rations  aft  bet^^an  ihui\'iduals. 

Evidence  tendine;  to  indicate  a  reserved  control  or 
dir'iction  of  the  •.Tork  negatives  the  idea  of  ^n  independeiit, 
original  ccntractcr,  nr.ving  full  control  ^nd  rrjsponslble 
for  the  coupleted  work  according;  to  contract.     Whatever 
be  the  relations  oetween  xhe  Aic4.bar3a  Power  Comuany  and 
ririe  Conscraction  Co-npan^'  int-'jr  sees,   ani   Lor;ard  the 
ecroloyoes  of  eacn,  if  an  elcuient  of  as^ency  enters  touching 
ijatters  aifectiii^;  the  ri^.ts  of  third  perr^ons,   the  principal 
oecor.ss   lirtie  icr  r.cc?   dene  v.ithin  the  scope  ot   the  agency 
cr  ecploynicnt . " 

In  th-e  cafe  of  the  Ue'7  York  Tr-ist  Conicany  v.   Carpenter,  250  J,   C68, 
the  Court  said: 


• 


"Of  course,  if  a  corporation  is  the  agent  of  another, 
owning  its  stock  or  not,  as  the  caco  aay  be,  through  which 
the  other  £^5  principal,  disclosed  or  undisclosed,  ca^Ties  on 
biisincs;:,  the  liabfity  of  the  princip3l  •.'•iil  oc  arcortained 
tnrough  prinjiplec  of  la;?  well  known  and.  long  ettatlished." 


-  14  - 


On  March  6,  1925,  the  Circuit  Court  of  i^jpoals  for  the  Sixth 
Circuit  decided  the  case  of  Hoopor-Mankin  Co.  v.  Matthew  Addy  Co., 
4  F.  (2d)  187.  The  following  quotation  from  the  opinion  sheds  light  upon 
the  status  of  parent  and  subsidiary  corporations  under  the  lav:: 

"Wo  need  refer  only  to  the  following  decisions  of  this 
Court:  Richmond  &   I.  Construction  Co.  v,  Hichcond,  etc.,  Co., 
68  F.  105,  108;  15  C.  C,  A.  289.  34  L.  R.  A.  625;  Pittsburgh  & 
Buffalo  Co.  V.  Duncan,  232  F.  584,  587,  146  C.  C.  A.  542;  N.Y. 
Trust  Co.  V.  Carpenter,  250  F.  668,  672  et  seq. ,  163  C.  C.  A.  14, 
and  cases  there  cited.  As  said  in  the  Duncan  case  (page  587), 
and  quoted  in  the  Carpenter  Case  (page  673):  'The  mere  fact  that 
the  stocklioldors  in  two  or  more  corporations  are  the  same,  or  that 
one  corporation  exorcises  a  control  over  the  other  through  owner- 
ship of  its  stock,  or  through  identity  of  its  stockholders,  does 
not  make  either  the  agent  of  the  other,  nor  does  it  merge  them  into 
one,  BO  as  to  make  a  contract  of  one  corporation  binding  upon  the 
other,  where  each  corporation  is  separately  organized  under  a 
distinct  charter.'   TITe  reaffirm  the  language  of  this  court  in  the 
Carpenter  Case  (page  674):  'From  an  examination  of  many  decisions, 
we  venture  to  say  that  no  corporation  acting  7ri.thin  its  povrers  has 
been  held  liable  for  the  debts  of  another  corporation  legally 
organized,  becaxise  it  controlled  such  corporation  by  reason  of 
ownership  of  its  stock,  or  otherwise,  except  by  reason  of  con- 
tract or  on  grounds  of  agency,  or  of  estoppel,  or  because  the 
controlled  corporation  has  been  used  in  such  a  way  that  the 
maintenance  of  its  character  as  a  separate  and  distinct  entity 
would  work  injustice.'  This  proposition  is  s-ostained  by  nuiierous 
carefully  considered  authorities." 

In  general,  corporations  employing  subsidiary  corporations  enter 
into  carefully  drarvn  contracts  covering  fully  and  explicitly  tlie  business 
relations  between  them,  and  it  wo-old  seen  advisable  in  all  instances  for 
cooperative  associatiors  vsing  cubsidiary  corporations  to  adopt  this 
course.  Attention  is  called  to  tac  following  quotation  from  the  opinion 
of  the  Supreme  Court  of  Utah  in  the  ci.se  of  Boston  Acme  1/lncs  Dev.  Co.  v. 
Claxison,  240  p.  1-35: 

"It  raay  be  coiiceucd  that  suca  proceedings  on  the  part 
of  corporations  aio  comet iLies  open  to  grave  tj.ispicion.   It 
all  depends  upon  thj  circ'JiaBtar.ceB  attendiijg  the  transaction. 
In  Fletcher,  Cyc.  Corp.  p.  1357,  p.  913,  it  is  said: 

• 

"'If  tne  right  tc  contract,  cxiots,   it  is  ijnnaterial 
that   the  same  officers  und  st^^ctdioldera  cortrcl  both  con- 
tracting corporations,   IF  IHS^  IS  iiC  li/a)  FAITH.'"    (Italics 
supplied. ) 

Gee,   also,  Siait.i  v.   Chrse  &  Baker  Piano  I-Ifg.   Co.,  et  al. 
(D.   G.)  197  F.  466,   in  Thich,   in  the  fourth  -leadcote,   it  js  said: 


-  15  - 

"•Corporations  controlled  and  maoaged  by  the  samo  officors 
and  stockholders  can  deal  with  each  other,  and  coui'ts  will  not 
interfuro  in  their  internal  affairs,  unless  the  action  of  the 
majority  in  control  is  dishonv-st  or  fraudulently  opprosBivu." 

In  this  connection  see  also  the  case  of  Alt.  Rof.  Co.  v.  Port  Roboa 
Pet.  Corp..  280  F.  935. 

Althoxi^i  it  is  believed  that  thu  majority  rule  vrith  respect  to  cor- 
porations having  the  same  officors  dealing  with  each  other  is  annoxinced 
above,  yet  it  is  submitted  that  it  would  be  advisable  to  inquire  in  each 
izistance  into  the  desirability  from  a  practical  and  le^al  standpoint  of 
having  the  officers  and  directors  of  a  parent  corporation  and  its  subsi- 
diary the  same  persons.  In  feict  in  a  few  States  it  appears  to  bo  necessary 
from  a  legal  standpoint  for  the  officers  of  the  two  corporations  to  be  dif- 
ferent. 7  R.  C.  L.  Sec.  333. 


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